Letter to the Office of the Comptroller of the Currency regarding DCCs and DSAs

On behalf of the Community Bankers Association of Illinois ("CBAI"), I am submitting this comment letter in response to a Notice of Proposed Rulemaking ("NPRM") published by the Office of the Comptroller of the Currency ("OCC"). CBAI is a professional, not-for-profit trade association representing the interests of more than 510 Illinois financial institutions. CBAI's members include commercial banks, savings and loan associations and savings banks that can be either federally-chartered or chartered by the State of Illinois. Members of CBAI can be found in each of Illinois' 102 counties. While CBAI provides numerous benefits and services for its members, CBAI's primary role is that of an advocate for the interests of community banking in Illinois. It is in this role that CBAI submits this comment letter.

First, it is the position of CBAI that the new regulation is unnecessary and could place regulatory burdens on national banks that are not faced by their state-chartered competitors. CBAI is not aware of any history of abuse in the offering or sale of DCCs or DSAs that justifies regulatory intervention at this time. Furthermore, the Illinois Office of Banks and Real Estate has opined that DCCs are "incidental to an Illinois bank's statutory authority to loan money and carry on a general banking business" [quoting from that agency's Interpretive Letter No. 94-11, issued June 15, 1994]. State-chartered banks in Illinois will presumably be able to continue offering DCCs without being subject to the regulatory requirements proposed in 12 CFR 37.

Notwithstanding these threshold concerns about the propriety of the new OCC regulation, the NPRM states that the OCC has decided "that some additional regulations in this area would be beneficial." Therefore, the balance of this comment letter will set forth CBAI's suggestions or concerns regarding proposed language in Sections 37.3, 37.4, 37.5 and 37.6.

Section 37.3 Prohibited practices

Section 37.3 (b) prohibits the use by a bank of "any practice that could mislead a reasonable person with respect to the information that must be disclosed under Sec. 37.6 (a) of this part" (emphasis added). CBAI's concern is that the "could mislead" standard is so vague and subjective as to expose a national bank to a violation and/or liability for a statement or action that was not intended to be deceptive. Although some degree of subjectivity may be inevitable, CBAI suggests that the relevant language in Section 37.3 (b) should prohibit practices "designed to mislead," or practices that have a "substantial likelihood of misleading" a reasonable person. Such standards would protect the national bank in the event of an innocent misunderstanding on the part of the "reasonable person" to whom the information was communicated.

Section 37.3 (d) provides that a national bank has no unilateral right to modify a DCC or DSA. CBAI suggests that this subsection be amended to clarify that the national bank may not unilaterally modify the contract "in a manner detrimental to the interests of the customer." This would be consistent with the regulation's goal of protecting the customer, but it would allow technical, nonsubstantive changes that may be necessary or appropriate without requiring the national bank to obtain the customer's concurrence.

Section 37.4 Affirmative election required

As proposed, Section 37.4 states that the customer's agreement to purchase a DCC or DSA must be "in writing in a document that is separate from the documents pertaining to the credit transaction" (emphasis added). CBAI believes that the DCC or DSA could also be construed as a document "pertaining to the credit transaction," and therefore the customer's written election to purchase such a contract would similarly pertain to the credit transaction. To clarify the ambiguity regarding certain of these documents being "separate from" others, and also to clarify the authority for these "separate" documents to be executed conveniently at the same opportunity, CBAI recommends that the second sentence in proposed Section 37.4 be restated in a manner similar to: "The customer's election must be in writing in a document that is separate from other documents pertaining to the credit transaction, although the document may be executed at the same time and place as other documents pertaining to the credit transaction."

Section 37.5 Refunds of fees in the event of termination of the agreement or prepayment of the covered loan

Section 37.5 requires national banks that offer DCCs or DSAs to offer those contracts with a refund feature. The refund would be in the amount of "any unearned portion of the fee paid for the product" at the time that the contract is terminated (including by prepayment of the loan). Although there is a rational argument in support of mandating a refund on behalf of customers who terminate the contracts, there are also arguments against the mandated refund option. First, if the bank clearly discloses that the DCC or DSA fee to be assessed is non-refundable and the customer elects to purchase the contract with that understanding, there is no deception or abusive practice on the bank's part. Second, DCCs and DSAs are not insurance policies and thus are not subject to any premium refund requirements that might apply to early termination of insurance policies. Finally, banks that offer DCCs and DSAs may use the fee income to build reserves necessary to offset the safety and soundness risk associated with cancellation of an obligor's payment responsibilities. National banks would be better able to calculate and fund such safety and soundness reserves if they did not have to factor in the loss of a portion of the fees that would result from refunds. For these reasons, CBAI requests that the OCC reconsider the provisions in Section 37.5 [and the related language in Section 37.6 (a) (6)] mandating that a national bank that offers DCCs or DSAs must include a refund option.

Section 37.6 Disclosures

In Section 37.6 (a) (5), the phrase "activation of the debt cancellation contract..." is used, but "activation" is undefined. We assume from the context that "activation" refers to the assertion by the customer of his or her right to cancel the debt or suspend payments on the debt, rather than the binding execution of the contract at the time of its purchase. If there is any ambiguity, however, the OCC should consider defining when the contract is "activated" for purposes of Section 37.6 (a) (5).

Thank you for this opportunity to comment on the NPRM concerning proposed 12 CFR 37. If you have any questions or if I can provide you with any additional information, please feel free to contact me.